Mortgage Market Year in Review

So Long 2009! (Note – I originally sent this out as part of my weekly e-mail series – Mortgage Market Week in Review – but the response was so positive that I thought I’d repost it here.)

1.  Without a doubt, the number one issue facing the mortgage market the past year was the Fed’s decision to purchase $1.25 Trillion in mortgage backed securities.   We saw probably the most dramatic one day drop in mortgage rates I recall in the 22 years I’ve been in this business.   The mortgage industry ended up writing literally millions of new loans at lower interest rates because of what the Fed did and that changed the ball game for lenders (both individual lenders and financial institutions).
But this subsidizing of the the mortgage market hasn’t been without it’s costs as well.  We’ve gone from a market that was relatively "free" to a market that has become much more dependent on the government and that’s not healthy in the long run.    Plus it makes you wonder, "what’s going to happen when the government stops?"   (That’s a topic for Monday’s update).

2. The second biggest issue that faced the mortgage world in 2009 was property values.    We started out the year being quite severely limited in terms of what we could do as property values fell.    Then Fannie and Freddie basically threw their rules out the window and essentially said, "If we have the loan, and we’re going to increase the customer’s likelihood of making their payments, then we’ll do the refinance."    The program is saving Fannie and Freddie’s borrowers literally millions of dollars if not more.    But a couple of things that need to be said:

• A lot of the clients that I talked to and did loans for weren’t really at risk of losing their home without refinancing.   Probably, (anecdotal reference only), no more than 10% of the people who took advantage of the new program were at risk of foreclosure.  But the vast majority of them were well over 80% loan to value even if they weren’t when they bought the house.   It showed how substantial the deterioration in values was.
• The loan modification portion of the program (for those who couldn’t qualify to refinance) has been an abject failure.   Why?   I think mainly because of this one fact – the borrowers either can’t afford the modified payments any way (not a big enough incentive) or they are so far under water in terms of the value of the house vs. the balance owed that they said, "Here bank, you have the keys, I’m out of here."
• The property value issues started in the lower price ranges and it has crept up the food chain.   The higher price areas are now getting hit just as much if not more than the lower priced areas.

3.  Government intervention is the third big issue that the mortgage world dealt with during 2009.  A couple of main points:

• The First Time HomeBuyer Tax Credit supposedly generated 350,000 (depending on who you talk to) new sales, but since 1. 8 million homeowners are anticipated to take advantage of it for 2009, that works out to a cost of over $43,000 per sale generated for a $8,000 tax credit.   Ouch.
• Give them the Checkbook – On Christmas Eve, the Treasury essentially gave Fannie and Freddie their checkbook and said they will back them for as much as it takes to keep them from going under.    They didn’t do it with any restrictions or controls of how they manage their business.    We’re going to see the ripple effects of that decision for a long time, I’m afraid.
• HVCC – Home Valuation Code of Conduct – a set of rules that basically make it a criminal offense for a loan officer to talk to an appraiser.    Has it improved the quality of appraisals?  I don’t see it.   Has it saved the customer money?   Nope, cost them $50 or more extra per appraisal.   Has it sped things up?   Nope, it’s slowed them down.   I’ll agree that there were some issues of undue influence, but it’s not addressing it the right way.
• Reg Z – what does Reg Z do?   It basically gives the customer a 5 day period to look over the paperwork and then decide if they want to do the loan.    What’s the end result?   It does give the borrower a little more control which is good, but it also slows the process down.
• The Three F’s control everything.   I couldn’t tell you how many times I’ve told people that there are three sources of money in today’s market – Fannie, Freddie and FHA and if you can’t get them to give you the money, you are…… destined to fail.   :-)     In all seriousness, the non-governmental mortgage market is non-existent.   There are some big issues that are going to have to be dealt with going forward.   Will we have the guts to make the tough decisions?   I don’t know.

I could go on for hours on each one of these topics, but I have to admit that time is running out on the year.   So consider this an overview of the things that I see have made a big difference in the last year.

It has been a lot of fun and a distinct privilege getting to know and communicate with all of you over the year.    I’ll have an overview on Monday of what I see are the 5 biggest issues the mortgage world will deal with in 2010.

Until then, if I can help, let me know.

Tom Vanderwell